June 08, 2008

Stupid people make money. The sky is falling.

Financial's in Australia have dropped at least 10-20% in the last few weeks alone. The sky is falling. If I were still in stocks in Australia I'd get the hell out and make the most of 8% interest rates on cash accounts.

I'm not bailing yet on the markets. Video games are a recession's best friend. Unemployment rates soaring? Petrol prices hitting all time highs? I just hope the Jone's are staying home to play their Wii.

So. How exactly do stupid people make money?

Ok. I'm being facetious, I don't mean stupid people. I mean your average mom and dad investor who 'dabbles' in the stock market, or a Japanese house wife dabbling in some forex gambling. Basically your average white collar John Doe who reads the Weekend Business Roundup and has CNBC.

Stupid people make money by luck. If you had put in $20,000 into the stock market 8 years ago, and had thrown darts at a board of investment picks you would have doubled your money. Blindfolded. Even after all the recent falls.

Stupid people have been lucky. And good for them, you don't need to be a genius to get on the gravy train, and nor should you need to be. You can bet that if there is a a gravy train, I'll be the first one on.

An article recently criticised the generation of stupid investors educated on a staple diet of CNBC, Bloomberg and Jim Cramer. It mentioned how they are the ones stuck like deer in the headlights right now. They were brought up on looking at P/E ratios (price to earnings) but either forgot, or don't care about where the E came from. Trust me earnings matter.

Funnily enough, the same investors, also worked in the white collar firms, and funnily enough, these execs also forgot that where the E comes from is more important than just making loads of it.

So it's come full circle, we educate a generation of stupid people, we put stupid people in charge of our firms and we ask them to invest in our firms. In the gaming world, they call this GG.

Now don't take this the wrong way. I'm not labelling an entire generation of people as not smart, or incapable of functioning as sentient intelligent human beings. Stupid is a term I'm using for people who are obviously smart enough to make themselves money to invest. These guys might be lawyers, accountants or doctors, for all I know, or care. But I see it time and time again, people with a fortune to invest and their only explanation for their investing is 'it's a bank. Banks are good, right?'